The Impact of Budget Sequestration on DOD Energy Innovation

The impacts of budget sequestration are slowly being unveiled to the general public. Furloughs at the Federal Aviation Authority (FAA) led to air traffic gridlock and angry travelers. Parks and national tourist sites are cutting back hours. And the Department of Defense (DOD) recently announced furloughs for 680,000 civilian employees. While these short-term impacts are painful, in particular to those losing work hours and income, sequestration is initiating cuts with negative, long-term impacts, which are not yet immediately apparent.

One area of specific concern is the potential $381 million in cuts to energy innovation investments at the DOD – a 25 percent cut compared to FY2012 levels. Since 2009, DOD has invested $5 billion in clean energy research, development, testing, demonstration, and procurement, representing almost 25 percent of U.S. clean energy funding in FY2012. DOD’s focus on clean energy innovation is important for three reasons:

The DOD has been the source of some of the last century’s most important breakthrough technologies, including the Internet, GPS, and microchips and it could have a similar impact on clean energy technologies like batteries and smart grid;

The DOD has developed its own cohesive innovation ecosystem that bridges its investments in research to its procurement budget and actual use of new technologies in the battlefield, which allows for accelerated pathways for technology development;

The DOD budget is typically not politically controversial in comparison to other sources of energy innovation investment like the Department of Energy, assuring consistent funding over time rather than periods of boom and bust.

During the past five years DOD has quickly ramped up its energy innovation investments to address strategic challenges impacting warfighters, such as protecting liquid fuel supply lines and addressing the geopolitical consequences of climate change. But budget sequestration threatens to slow, or even halt, these efforts.

According to the Budget Control Act of 2011 – the legislative vehicle for the sequester – the DOD budget must be reduced by 9.4 percent beginning in FY2013 from its FY2011 budget and then remain at those levels with minimum increases through FY2021. The severity of sequestration indicates that most programs will feel at least some budget pain, but it’s unclear how each energy program or project will specifically be impacted until DOD leadership decide how to allocate the cuts. Even so, we can estimate how much investment in energy innovation will be reduced at DOD if cuts are made across-the-board.

ITIF’s Energy Innovation Tracker details each of DOD’s energy innovation projects in an easy to use database and provides a good baseline to estimate sequestration cuts. According to the Tracker, the DOD invested roughly $1.5 billion in energy innovation in FY2012, which I’ll use as a close proxy for this year’s budget because Congress simply passed an FY2013 Continuing Resolution rather than a new budget. I also group DOD’s energy innovation budget into two buckets: (1) research, development, testing, and demonstration; and (2) procurement.

Table 1 estimates cuts to energy research, development, testing, and demonstration programs. The second column represents DOD’s energy research budget baseline in FY2011 using Tracker data. The third column represents DOD’s energy budget in FY2012. Assuming the DOD cuts each of these tranches of research funding evenly, I estimate the 9.4 percent cut to each services research budget compared to the FY2011 baseline in the third column. The total estimated sequestration cut compared to DOD’s FY2012 budget is shown in the last column. Based off of these assumptions, sequestration cuts $195.7 million from DOD’s FY2012 energy research budgets, or roughly 19.6 percent.

Table 2 details the same estimation as Table 1, but for DOD’s energy procurement investments. Sequestration cuts $185.2 million from DOD energy procurement investment in FY2012, or a total cut of 38 percent. In total, I estimate that sequestration is cutting DOD energy innovation investments by $380.9 million, or 25.7 percent from its FY2012 budget of $1.5 billion.

What does this mean for DOD energy innovation? Immediately, sequestration is reducing the Army’s ability to develop and demonstrate new hybrid and all-electric vehicle technology for its Green Warrior Convoy, and the Navy’s ability to develop highly efficient power electronics systems in the pursuit of electrifying its ship fleet. It also may reduce DOD’s ability to procure next-generation biofuels for both the Air Force and the Navy, and advanced mobile electric grid systems for the Army. These innovations in power generation and use have the potential to spill over into commercial markets with DOD’s research, testing, and procurement support.

Of course, cuts to DOD’s energy innovation programs may be more or less severe depending on how the DOD prioritizes projects. These estimates don’t attempt to prioritize programs, rather give a sense of how an across-the-board sequestration would impact DOD energy innovation. Nonetheless, to make the numbers work, DOD will almost certainly have to scale back its energy innovation investments to the detriment of its long-term ability to meet its energy security goals.

And at least up until now, DOD has shown an interest in not cutting some of its energy innovation investments. For example, it recently announced a new round of procurement for next-generation biofuels as part of its effort to diversify its liquid fuel options. It’s also moving forward with its planned $7 billion Multiple Award Task Order Contract program through the Army Corp of Engineers. The DOD is contracting renewable energy companies to build and maintain renewable electricity generation projects and in exchange, DOD will sign a long-term power purchase agreement (PPA). DOD just signed agreements for geothermal-based electricity generation projects and will announce other renewable sources later this year.

Only time will tell whether the DOD decides to cut $381 million from its budget elsewhere or decide energy innovation must take a big hit. As ITIF has written before, decisions like these are being made across the federally funded innovation enterprise, as sequestration could potentially cut $12.5 billion from public research budgets. DOD’s ramp-up of investment in energy innovation in recent years shows the significant interest of the defense industry to accelerate the development of energy options for security and mission flexibility. Sequestration could slow – or even stop – these efforts.

By ben on May 17, 2013 at 12:55 pm

The invocation of the “defense industry” vice an alternative use of the “American people” in the closing paragraph is telling. The disconnect between what various commercial interests hold dear, as they pursue the golden fleece of the annual authorization and appropriation process, from the interests of the average taxpayer ultimatley translates into a steady erosion of confidence in the affairs of state.
One might argue that sequestration is but the consquence of such disconnections reaching the tipping point on a number of fronts. Regardless of the merits, debt financing of “public investments” carries actual costs far beyond those budgeted.

The upshot: The cuts accompanying sequestration will slow, but not terminate, most of the R&D and procurement account projects in the pipeline. It will, however, impact the tempo and scale of various initiatives where a number will likely wither on the vine in the absence of consequential deliverables (whatever that really means in an era of such smoke and mirrors). If this isn’t in itself welcome news, the important benefits may come in the heuristic insights resulting from a need to think and act anew within the government and semi-private sector. Perhaps, as someone like Nassim Taleb might put it, the strength that matters most often comes from the friction of adversity that helps illuminate the road ahead. One things certain, the public’s sour mood serves as a brake on the organizational and personal aspirations of those within and along the Capital Beltway.

The above litany is an example of believing the myth instead of digging up the reality. When the government spends taxpayer money, it does not get the value for it that person who earned it would if they were allowed to spend it. Witness the Post Office, Amtrak, Social Security, Medicare, Fannie Mae, Freddie Mac, and our beloved IRS. DoD is no better. When $60 million of federal taxpayer money and $40M of state taxpayer money finance a $100 million install of a solar farm on taxpayer land at Nellis Air Force Base which was half composed of Chinese solar panels and only returns $1.2 million a year in savings (an 83-yr payback) for its 20-yr lifespan, and has already been through 3 O&M contractors, one of which was Spanish, and which was installed without transfer switches and the circuits necessary for it to power the base when the city grid is down, it is hard to see how the government is furthering energy security let alone spurring innovation. It is more likely stimulating campaign bundlers and administration cronies. Only four-star fools would trade petroleum-fueled vehicles, which represent the pinnacle of power density, for all-electric vehicles on the battlefield when the simplest calculations would tell them that they are sacrificing range and performance to the enemy. A state of the art Tesla S delivers 127 kWh per tonne of energy ouput (payload & range) compared to 474 kWh/tonne for a Ford Mustang with the same horsepower and restricted to an equivalent-range fuel load (11 gallons of gasoline). The best all-electric car is 27% of the mass-produced internal-combustion gasoline car at four times the price. The retrograde pursuit of biofuel energy from agriculture is another forehead slapper. The DoE is kind enough to report that as of Jan 2013, ethanol is still $1.19 a gallon more than gasoline and biodiesel $0.82 more than petroleum diesel when they are compared on an equal energy basis despite 8 years of $6.1 billion a year subsidies and EPA blending mandates (http://www.afdc.energy.gov/uploads/publication/alternative_fuel_price_report_jan_2013.pdf ). And even with that markup, neither of these fuels are compatible with tactical military vehicles or jet aircraft in the tiniest quantities, but must be first transformed into true hydrocarbons by “hydrotreatment,” an exquisitely expensive process that results in fuels that have cost the DoD an average of more than $50 a gallon for the 1.36 million gallons it has purchased since 2009, the latest batch of which, purchased in March, cost $59.00 a gallon (Gevo camelina jet fuel).

Solar panels and electric vehicles and agriculture-based energy are expensive lifestyle choices for ideologues, not sound military or national security policies for responsible generals or statesmen. We need our government to stop chasing what sounds good and go back to what works–and confine themselves to doing what we the people told them to do, not have them play Momma Stalin and tell us what is good for us. The military is no place for ideologues and political social climbers and venture capitalists playing frivolously with OPM. We need a new crew of pragmatists with grandchildren they love and whose motivation is not self-enrichment, but instead to leave some shred of the legacy that was once a great nation to the next generation.

Find out who picked the winners and why, and what lasting value and permanent jobs have actually resulted the billions spent by DoE and DoD. The Washington Post was only able to find 4,000 permanent jobs as of 2010 with $17 billion of alternative energy money spent. How is this trajectory good for the economy, the military, the nation, the future?

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Matthew Stepp is a Senior Analyst with the Information Technology and Innovation Foundation (ITIF) specializing in climate change and clean energy policy. His research interests include clean energy technology development, climate science policy development, transportation policy, and the role innovation has in economic growth.